Auditing 3A

COAUA3-33

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Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
Let’s Get Ready Review:
Questions/Notes for Discussion

Module Guide Please always refer to your MG for your weekly learning outcomes.

Lesson 1: Discuss the purpose of the Auditing Profession Act (APA)

Lesson 2: What is the role in IRBA in the South African Auditing Profession?
 What is the objective
of today’s lesson?
Week 2

Lesson 1: Auditing Regulatory Environment

Auditing and Ethical

Conduct SAICA Code of Conduct

Class Activities

Threats to Compliance with Fundamental

Principles
Week 2: – The SAICA Code of Conduct

Learning outcome

In this lesson, you will learn about the importance of ethical values in auditing
Week 2: – General Regulatory Environment

ü An auditor should be aware of the regulatory environment which governs companies on a broad basis.
ü In order to provide a proper service and to reduce audit risk, an auditor has to ensure that he has
proper knowledge of the laws and regulations which govern the audit profession. They include:
• The Auditing Profession Act 26 of 2005
• Companies Act 71 of 2008
• The Close Corporation Act 1984
• Public Finance Management Act
• The King Code of Corporate Governance
• SAICA Code of Professional Conduct
Fundamental Principles

§ It is one of the most crucial prerequisites for accountants and auditors to attain the highest
ethical and professional standards, both singularly and collectively so as to retain public
confidence in their work.
§ The SAICA Code of Professional Conduct establishes five fundamental principles, with which
professional accountants must comply:
ü Integrity
ü Objectivity
ü Professional competence and due care
ü Confidentiality, and
ü Professional behaviour.
Principle: Integrity

§ The principle of integrity requires honesty, straightforwardness, fair dealing and truthfulness in
professional and business relationships.
§ Professional accountants should not be associated with information they believe:
o Contains a materially false or misleading statement;
o Contains statements or information provided recklessly; or
o Omits or obscures information where such omission or obscurity would be misleading.
§ If a professional accountant becomes aware that he has been associated with such information,
he must take steps to disassociate himself therefrom.
Principle: Objectivity

§ Professional accountants should not allow bias, conflict of interest, or undue influence of others
to override or compromise professional or business judgements.
Principle: Professional Competence & Due Care

§ Professional accountants are required to:

Ø Attain and maintain professional knowledge and skill at a level which ensures that clients
receive competent professional service. This emphasises the importance of continuing
professional development. To maintain professional competence a professional accountant
must remain abreast of relevant technical, professional and business developments.
Ø Act diligently in accordance with applicable technical and professional standards when
providing professional services. This also means acting timeously, carefully, thoroughly and in
accordance with the requirements of the assignment.
Principle: Confidentiality

§ Professional accountants are required to:

Ø Respect the confidentiality of information acquired as a result of professional and business
relationships. This means
• Not using confidential information acquired from the engagement for his personal advantage
or for the advantage of a third party.
• Not disclosing such information outside the firm without proper and specific authority, unless
there is a legal or professional duty or right to disclose.
• Not using or disclosing such information even after the relationship has ended.
Principle: Confidentiality – When is disclosure permitted?

§ Disclosure is permitted when:

ü Disclosure is permitted by law and is authorized by the client.
ü Disclosure is required by law, for example,
o Providing documents or other provision of evidence in the course of legal proceedings,
o Disclosure to appropriate public authorities, including disclosures of reportable irregularities.
Principle: Confidentiality – When is disclosure permitted?

ü There is a professional duty or right to disclose confidential information about a client, for
example,
o To comply with the quality review of the regulatory board or the professional body
o To respond to an enquiry or investigation by the regulatory board or body
o To protect the professional interests of a professional accountant in legal proceedings
o To comply with technical standards and the requirements of this code.
Principle: Confidentiality – Factors to consider

ü Whether the interests of all parties, including third parties could be unnecessarily or unjustly
harmed by the disclosures if the client consents to the disclosure of information.
ü Whether all relevant information is known and substantiated.
ü Whether the method or type of communication is appropriate and the recipient of
information is appropriate.
Principle: Confidentiality – Professional Behaviour

§ This fundamental principle requires that professional accountants:

ü Comply with relevant laws and regulations
ü Avoid any action which the professional accountant knows or should know that may bring
discredit to the profession
§ When doing publicity or advertising, a professional accountant must:
ü Not bring the profession into disrepute
ü Be honest and truthful
ü Not make exaggerated claims for the services they offer, the qualifications they possess, or
experience they have gained.
ü Not make disparaging references or unsubstantiated comparisons to the work of others.
Class Activity

Under the CIMA AND SAICA Code of Ethics, members are not allowed to be
associated with any materially false or misleading statements. Which ONE of the
fundamental ethical principles does this statement relate to?

A Integrity
B Professional competence
C Objectivity
D Professional behaviour
Class Activity 2
§ Explain why each of the following action appears to be in conflict with fundamental ethical principles.

1. An advertisement for a firm of accountants states that their audit services are cheaper and more
comprehensive than a rival firm.
2. An accountant prepares a set of accounts prior to undertaking the audit of those accounts.
3. A director discusses an impending share issue with colleagues at a golf club dinner.
4. The finance director attempts to complete the company’s taxation computation following the acquisition
of some foreign subsidiaries.
5. A financial accountant confirms that a report on his company is correct, even though the report omits to
mention some important liabilities.
6. You believe your colleague has asked you to include what you believe to be misleading information in
your forecast.
7. Your analysis of a strategic proposal suggests that profitability will be improved by making 30 people
redundant.
8. Your country is allowed, legally, to dump its waste into a river. This will kill all aquatic life along a 50-mile
stretch.
Week 1: Solution to Class Activity 1

QUESTION 1.

The correct answer is INTEGRITY.

Week 1: Solutions to Class Activity 2
Q1. Potential conflict with professional behaviour – audit services observe the same
standards.
Q2. Objectivity because errors made in the accounts during preparation may not
be identified when those accounts are reviewed.
Q3. Confidentiality
Q4. Professional knowledge of foreign country’s taxation may not be held by the
accountant.
Q5. Integrity – report incorrect.
Q6. Integrity – misleading information.
Q7. Integrity – the accountant should ensure that the analysis was correct and was not
provided recklessly.
Q8. Professional behaviour – even though legally allowed there is an ethical issue that
is likely to bring the profession into disrepute.
Threats to Compliance with the Fundamental Principles

Advocacy
Threats

Self-interest Self-review
Threats Threats

Fundamental
Principles

Familiarity
Intimidation
Threats
Threats
 These are financial or other interests that may inappropriately influence the
professional accountant’s judgement or behaviour and lead him to act in his own self-
interest. For example:

• A professional accountant has shares in an audit client (Objectivity)

• A firm is dependent for its survival on the fees from one client (Objectivity)
Self- • A member of the audit team will join the client as an employee shortly after the
Interest
Threats completion of the audit (Objectivity)
• The client is placing pressure on the audit firm to reduce fees (Objectivity,
professional competence and due care, for example, the audit team may cut
corners to save costs).
• The engagement partner obtains confidential information about the client which he
could use to his own financial advantage (Objectivity, integrity, confidentiality, and
professional behaviour).
 Threats that a professional accountant will not appropriately evaluate the results of a
previous service performed by him or her or by another member in his firm on which
the professional accountant will rely as part of his current service. For example:

• A former employee of an audit client joins an audit firm that used to audit his former

Self-Review company and is part of the team that will audit his former employer where he
Threats performed financial accounting duties (Objectivity, professional competence and
due care).
• A firm issuing an audit opinion on the financial statements of a company for which
the firm has designed or implemented the internal control system (Objectivity,
professional competence and due care).
 Threats that may arise when a professional accountant becomes too sympathetic to the
interests of others because of a close relationship between them. For example:

• The professional accountant accepts gifts or preferential treatment from a client

(Objectivity).
Familiarity • A member of the engagement team’s father is responsible for the financial data
Threats
which is the subject of the audit engagement.
• The audit engagement partner and audit manager have a long association with the
audit client (Objectivity and potential professional competence and due care, as
the audit becomes too casual and friendly)
 These are threats that may arise when a professional accountant promotes a client’s
position to a point that his subsequent objectivity may be compromised. For example:
Advocacy
Threats • The professional accountant values a client’s shares and then leads the negotiations
on the sale of the client’s company.
 These are threats that occur when a professional accountant may be deterred from
acting objectively by actual or perceived pressures including attempts to exercise
undue influence. For example:

• A professional accountant in business fails to report a fraud perpetrated by his

Intimidation superior because he fears that he will be dismissed or victimised in some other ways
Threats (Objectivity, integrity, professional behaviour).
• An audit firm is being threatened with dismissal from the engagement (Objectivity).
• Pressure to accept an inappropriate decision on an accounting matter is exerted by
the client’s financial director on a young, inexperienced audit manager (Objectivity
and integrity)
Evaluating and Addressing threats

Threat at acceptable level?

If threat to fundamental principle(s) not at

an acceptable level, address by:
• Eliminating what is creating the threat(s);
• Applying safeguards;
• Declining or ending the professional activity.
Class discussion
Provide an example of each threat.

Threat Example/Scenario
Self-interest
Intimidation
Self-review
Advocacy
Familiarity
Activity Vince Barnard, a CA(SA) and registered auditor, has just been approached by Belmont Ltd (Belmont) to

replace their previous auditor. The financial director of Belmont is Vince’s cousin, Shane Mendez. Vince

and Shane had always been close, and Shane had promised Vince that he would get him appointed as

auditor as soon as Vince qualified as a chartered accountant.

As Vince was unfamiliar with the kind of work that Belmont actually does, he decided that he would

contact the previous auditor and get some inside information on the company and the other directors.

The previous auditor was really friendly and spoke openly about Belmont. He even told Vince about the

planned merger between Belmont and one of its competitors – information which was not yet publicly

known.

During the course of the audit, Vince discovered a tax issue that Belmont was having trouble resolving.

Since tax was not one of Vince’s strong points, he decided that he should rather refer Belmont to Christy

Peterson, one his former classmates from university who recently qualified as a tax specialist. He often
referred clients to Christy for a fee.
Source: Daniels, J.C. 2023
Activity
REQUIRED

In your group:

1. Discuss the fundamental principles of the SAICA Code of Professional Conduct.

2. List the fundamental principles of the SAICA Code of Professional Conduct which

might be threatened in the above scenario and motivate your reasons

Source: Daniels, J.C. 2023

Further Reading
Study the following section in your prescribed book:

q Tables for illustrative examples from page 2/40 to 2/56.

q Section 2,5: Rules regarding improper conduct (IRBA)

What Happens Next?
To be completed before the next lecturer-led session (self-directed learning and assessments):
• Attempt Practice Activities on myLMS
• Read the notes on the Companies Act

What will be covered in the next lecturer-led session:

• The Companies Act